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Simulating a Catastrophe Insurer

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This Demonstration simulates the financial history of a catastrophe insurer. You select a variety of parameters that affect that financial history and the Demonstration responds with a graphic showing the annual net worth of the insurer for each of a user-chosen number of sample runs. You can also choose to display a histogram showing the distribution of the net worth of the insurer either at the end of the simulations or at its lowest annual value.

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You choose a number of parameters likely to affect the financial histories. You choose the number of years for which the Demonstration computes the annual covered losses suffered by the insurer as a result of catastrophes such as earthquakes, hurricanes, or tornadoes. You choose the number of sample runs of the system. You can choose to amplify (or reduce) the losses resulting from each event. You also determine the initial balance sheet of the insurer (assets and liabilities), the interest rate the insurer pays on debt, and the amortization period of debt. Finally, you affect the annual operating profits and losses of the insurer by determining its annual premium revenue net of overhead expenses, the return it makes on its assets, and any legal limitation on the amount of losses it needs to pay.

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Contributed by: Seth J. Chandler (March 2011)
Open content licensed under CC BY-NC-SA

Snapshots

Details

The data from which the event sets are calculated is based on the projected losses of the Texas Windstorm Insurance Association from hurricanes as of 2007.

Snapshot 1: the distribution of the terminal net worth of the insurer using the default settings

Snapshot 2: the distribution of the lowest annual net worth of the insurer using the default settings

Snapshot 3: the financial history of the insurer if maximum losses are capped at 5 instead of the default value of 1

Snapshot 4: the financial history of the insurer if it has to borrow at 8% instead of the default value of 5%

Snapshot 5: the financial history of the insurer if losses are amplified by 50%

Snapshot 6: the financial history of the insurer if premiums are increased by about 50% over their default value

Snapshot 7: the financial history of the insurer using 50-year runs

Snapshot 8: the distribution of the lowest annual net worth of the insurer using 50-year runs

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